Is the standard of claiming damages from the EU insurmountable? EU Court refuses to recognize loss suffered by UPS from the EC’s unlawful prohibition of the proposed UPS/TNT transaction

On 23 February 2022, the EU's General Court (GC) dismissed a €1.7 billion claim for damages brought by United Parcel Service Inc. (UPS) against the European Commission (EC).¹ UPS sought compensation for the losses resulting from the EC's decision to block UPS' merger with TNT NV (TNT).²  The GC, which had quashed the EC's merger prohibition decision, found that the EC's breach of UPS' rights of defense constituted a serious breach of EU law, but rejected UPS' claim for compensation, reasoning that there was no causal link between the infringement and the damages claimed.

Background

• January 2013: The EC blocked the proposed acquisition of TNT by UPS because it would significantly impede competition in the market for international express small package delivery services in 15 EEA Member States. In those Member States, the number of competitors would have been reduced to three – possibly two – with DHL remaining as the only real alternative to UPS. The EC also concluded that the merger would have resulted in a price increase for customers, and in that regard relied heavily on an economic analysis that was contested by the parties.

• January 2016: The EC cleared the merger between UPS' competitor, FedEx, and TNT Express,  effectively closing the path for any consolidation for UPS.³
• March 2017: The GC annulled the EC's prohibition decision, on the grounds that the EC had breached UPS' rights of defense because it failed to share the final version of its economic analysis used to analyze the price increases allegedly resulting from the transaction.⁴  The GC found that UPS should have been given the opportunity to comment on all the elements on which the EC intended to base its decision, and that this meant that it should have been able to review and comment on the amended economic model.
• February 2018: UPS sued the EC, claiming €1.7 billion in compensation for the loss suffered as a result of the EC's unlawful prohibition decision.
• January 2019: The Court of Justice of the European Union (CJEU) confirmed the 2017 GC judgment.⁵ See our alert on the judgment here. 
• February 2022: The GC delivered its judgment in relation to UPS' damages claim.

Non-contractual liability of EU institutions

The GC acknowledged that an individual's right to seek damages in the event of a breach of law by a public administration (as enshrined in Article 340 of the Treaty on the Functioning of the European Union (TFEU)) is an essential guarantee of fundamental rights in the EU. 

For EU institutions to incur non-contractual liability, three cumulative conditions must be satisfied: 

(i) the rule of law infringed must be intended to confer rights on individuals and the breach must be sufficiently serious;

(ii) actual damage must be shown to have occurred; and 

(iii) there must be a direct causal link between the breach of the obligation and the damage sustained.

The breach of UPS' procedural rights constituted a serious breach of EU law

The GC clarified that a breach of a rule of law by the EC is sufficiently serious when the latter has manifestly and gravely disregarded the limits of its discretion. The standard is high, since a balance needs to be struck between the protection of individuals against the EC's unlawful conduct and the leeway that must be accorded to the EU institutions in order not to paralyze their actions, particularly where the EC needs to conduct complex economic and legal assessments.

The EC argued that the breach of UPS' rights of defense was not sufficiently serious because the case law was not yet clear on the EC's obligation to communicate economic models to the parties. In any event, before finalizing the economic model, numerous exchanges on the model had taken place between the EC and UPS. Moreover, the EC noted that it had been subject to the EU Merger Regulation's short and strict deadlines and that the case at hand had been particularly complex.

The GC disagreed. While the need for administrative efficiency can be taken into account to assess the seriousness of the breach of the parties' rights of defense, this could not justify the non-disclosure of the final economic model to UPS.

The GC stressed that the parties' right to have access to file is a necessary corollary of the rights of defense and can be abridged only to protect the legitimate rights of the parties involved (e.g., prevention of disclosure of commercially sensitive information). Since economic analyses are important tools to identify the possible effects of the transaction, they must be made available to the parties before the final decision is adopted.

Moreover, the economic model was available months before the adoption of the prohibition decision. The EC did not enjoy discretion with respect to communicating it to UPS; it simply had to provide it. By failing to do so, the EC not only avoided a procedural constraint intended to safeguard the legitimacy and fairness of the EU's merger control procedure, but also placed UPS in a position where it was unable to understand part of the grounds of the decision. Accordingly, the first condition for the EC's liability was met.

The GC found however that the EC's failure to communicate the final economic model to UPS resulted in a flawed substantive assessment of the concentration. While it acknowledged that the EC disregarded its own rules and used an economic model that departs significantly from standard economic practice, the GC did not find a sufficiently serious breach of EU law giving rise to non-contractual liability of the EU in that respect.

As a result, the sufficiently serious breach was limited to a breach of procedural rights and did not extend to the substantive assessment of the concentration. This finding may have influenced the GC findings on the causal link as described below.

No causal link between the alleged damage and the EC's breach

UPS asked for damages of €1.7 billion because of the EC prohibition decision. This included: (i) loss of profit amounting to €1.6 billion, reflecting the net value of the synergies of the proposed UPS/TNT transaction; (ii) a €200 million payment to TNT as a break-up fee for not completing the transaction; and (iii) costs associated with UPS' participation in the merger procedure of the subsequent FedEx/TNT transaction.

The GC rejected all of UPS' claims based on lack of a causal link between the damages sought and the breach of UPS' procedural rights by the EC.

Lost profit

According to the GC, it could not be presumed that the UPS/TNT transaction would have been approved had UPS' procedural rights not been breached. In particular, the GC found that UPS failed to provide evidence that the EC's errors in the economic model were sufficient to entirely invalidate it and that the outcome of the case would have been different, should the errors not have been made.

This puts a very high evidentiary burden on the party claiming damages. In essence, for the EC to be liable, the EC's error must be so grave as to indicate that, but for the error, the outcome of the case could have been different. This is a very high standard, which UPS argued was in fact insurmountable. Presumably, the GC's findings would have been different if the serious breach had not been limited to a breach of procedural rights but had extended to the substantive assessment.

The GC also noted that the EC decision did not solely rely on the economic model and therefore the infringement of the rights of defense was unlikely to have a decisive impact on the outcome of the merger control review. Moreover, the GC found that UPS' decision not to go ahead with the proposed transaction following the EC's prohibition decision and not to submit a new offer for TNT had the effect of breaking any direct causal link between the breach of procedural rights and the alleged damage. The GC relied on Schneider Electric, where the CJEU annulled the previous decision of the GC that had found a sufficient causal link between the EC's illegality and the damages claimed.⁶

Break-up fee and intervention in the FedEx/TNT transaction

The GC also found that the payment of the break-up fee and UPS' intervention in the FedEx/TNT transaction were a result of UPS' commercial decisions and did not result from the EC's breach of UPS' procedural rights.

According to the GC, the payment of the break-up fee to TNT stemmed from a contractual obligation arising from the agreement between UPS and TNT and reflected the parties' willingness to divide among themselves the risk that the EC would not approve the proposed transaction. Equally, UPS' participation in the merger control procedure of the subsequent FedEx/TNT transaction was the result of UPS' free choice. Thus, the EC's breach of UPS' procedural rights could not "constitute the determining cause" of the damages sought.

This effectively bars the possibility that the EC could be liable for a break fee or transaction costs, even if it commits a serious breach of law and even if the parties are able to show that the outcome of the EC's review could have been different but for that breach.

Takeaways

The judgment confirms that while the EC can, in principle, be liable for damages if it infringes parties' rights of defense in the merger review, the standard to prove such damages and especially their causal link with the authority's error is practically insurmountable, as one already needed to suspect based on the Schneider Electric judgment of 15 years ago. The judgment thus raises the question whether any error by the EC in the context of merger control can trigger liability for the losses suffered by the parties.

The GC effectively excludes the possibility that the parties be reimbursed for the transaction costs, break-up fees, or any other losses resulting from the parties' "free choice" to enter into the transaction and allocate antitrust risk between each other. Such a standard seems to ignore business reality.

Similarly, securing damages for the lost profits is equally difficult, as the claimant is required to show that the merger would have been approved if there had been no procedural error by the authority. For the EU's non-contractual liability to be more than illusory, it should be re-assessed whether the burden of proof should be shifted so that the EC would have to prove that its procedural errors had no effect on the outcome of its merger decision.

Giulio Preti (Legal Trainee, White & Case, Brussels) co-authored this publication.

_{1 Judgment of 23 February 2022, United Parcel Service v Commission, T-834/17, EU:T:2022:84 (the judgment). 
2 Commission decision of 30 January 2013 in Case M.6570 – UPS/ TNT EXPRESS.
3 Commission decision of 8 January 2016 in Case M.7630 – FEDEX/ TNT EXPRESS. 
4 Judgment of 7 March 2017, United Parcel Service v Commission, T-194/13, EU:T:2017:144. 
5 Judgment of 16 January 2019, Commission v United Parcel Service, C-265/17 P, EU
6 Judgment of 16 July 2009, Commission v Schneider Electric, 440/07 P, EU:C:2009:459.}

_{White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities.}

_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}

_{© 2022 White & Case LLP}